All posts tagged foreign exchange intervention

This week marks a quarter of a century since the major developed countries signed the Plaza accord, and once again there’s talk of coordinated foreign exchange intervention.

Could it happen again? Sure, but it probably won’t. It’s not necessary.

Here’s why. The 1985 Plaza accord was an agreement on the part of the U.S., Japanese, and major European governments to depreciate the dollar. It was an effort to kick-start the U.S. economy, which was struggling with a large current account deficit, an overvalued currency and an economy still struggling to get back to full employment in the wake of the early 1980s recession.

Sounds familiar, right?

In 1985, the U.S. economy still had a near 1% negative output gap, a 7.2% unemployment rate and a 2.8% current account deficit, according to IMF data. This year, those respective numbers are forecast at 2%, 9.4% and 3.3% respectively. What better case for a coordinated U.S. dollar devaluation?

None. Except for the fact that every central bank wants to devalue its way into export-led growth. Clearly, this is impossible. But it hasn’t stopped governments from trying.